EU regulation of crypto

The Challenges of Virtual Currency

Cryptocurrencies have for some time now been a staple of news both in the financial industry and in mainstream media. With EU introducing GDPR and PSD2 in a move to - among other things - improve security and quality of financial services, the issue of crypto becomes a pressing one. Clearly, it needs to be regulated. The question is how, and what are the challenges of creating regulation for a completely new type of currency?

New Player, Old Field

Well, even if crypto is a new development, the European Securities and Markets Authority (ESMA) has expressed a firm opinion that the European Commission should not instill new rules and laws to govern crypto but rather regulate it within the existing legislation.

The argument here is that most cryptocurrency assets are already covered by the Unfair Commercial Practices Directive - however, experts pointed out that this regulation covers cryptocurrency only in the basic sense that it labels crypto issuers as businesses and their purchasers as consumers.

Digital money comes in several different classes, from payment and utility tokens to asset tokens.

Who Goes Where?

For example, bitcoins are payment tokens, but are not covered by Markets in the Financial Instruments Directive, nor the Prospectus Regulation or the Market Abuse Regulation. Since bitcoin and all other crypto like it bear most of the same risks as any other investment object, experts are urging the EU to place such crypto inside MiFID II's scope.

Utility tokens are not classified as investments but rather a means for investors to access products and services a company has on offer. A large percentage of utility tokens are issued when a company or a startup are looking to raise capital and sell them to investors. This is known as Initial Coin Offering and can be viewed in two ways. If the money invested in exchange for ICO guarantees the investor shares in the project, this falls under ESMA regulations.

If, however, the investor receives only tokens, then existing EU regulations do not apply because these tokens are not transferable and are usable only between the issuer and user.

On the other side, if a utility token is considered transferable, it should fall under MiFID II. An example is Filecoin, which could become, while currently isn't, an investment object and as such would carry many of the same risks as traditional stocks.

Asset tokens represent physical goods and as such can be used in financing new businesses. Asset tokens can represent titles and transfers of goods and both parties in the transaction can benefit from its blockchain technology and strong security measures.

An example of asset tokens that should fall under existing regulation is EOS, since it can be purchased and traded via digital exchanges, and is transferable between participating merchants, reward programs and all compatible wallets.

Crypto for the Future

A recent attempt to address crypto concerns came in 2017 and was dubbed the 5AML Directive. 5AML targets everyone from exchange platforms to wallet providers, requiring them to identify their users and provide access to user information to investigative bodies.

The exchange of fiat currency for crypto and vice versa is covered by the AML Directives but any other type of exchange transaction (e.g. payment using cryptocurrency) cannot be regulated due to the specific nature of blockchain technology.

For 2019, EBA is preparing a number of actions that will deal with crypto concerns, such as money laundering. It plans to enhance the monitoring of crypto use by financial institutions with closer focus on their crypto-asset activities and consumer-facing disclosure practices of financial institutions.

There is, however, a point that has to be kept in mind with regards to crypto in the EU: any EU legislation is only a requirement from its members for a particular result.

This means that regulatory approaches will differ from country to country and while a unified strategy can be put in place for the entire EU, the specific implementation will be up to individual members.

Take a look at what Nikola Škorić, CEO of Electrocoin and Bitcoin mjenjacnica, first Croatian cryptocurrency brokerage and one of the founders of the Croatian association for blockchain and cryptocurrency, has to say about the EU regulation of cryptocurrencies and its future.